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BRICS ‘n’ China Shop

Halfway around the world in New Dehli, a conference will be held later this month between developing nations. It’s hard to imagine anything further from the minds of most Americans, and it’s unlikely to make the news. Yet what sources say will be announced could change our economy and standing in the world more than anything else that will happen this year, given enough time. It could mark the moment that China takes its natural next step on the world’s stage.

Economic restructuring always occurs in a Depression as the system that crashed at the start emerges as a different arrangement that looks ahead to the future. It’s a time of great opportunity, sometimes disguised as desperation. That restructuring is taking place in the USofA slowly, but much more rapidly when the sun shines on the other side of the globe. That’s why we should be careful what we wish for in the dead of the night.

The conference in question is between the Central banks of the BRICS nations – Brazil, Russia, India, China, and South Africa. They will agree to open up their banking to each other and use their own currencies in exchanges. It’s the first step toward a convertible Renminbi (RMB), the term for the Chinese currency (technically the Yuan). Once it is used as an international medium of exchange it will eventually start to float versus every other currency in the world.

These five nations together are about 20% of the world’s product, but more importantly they are the fastest growing economies. Brazil, for example, just passed the UK to become the sixth largest economy in the world, growing at an annual rate of 2.7% compared to Britain’s paltry 0.8%. Within 10 years these nations could be easily be a quarter of everything made and consumed on the earth.

This is extremely important for many reasons. The first is that the USofA has long been concerned that China does not “play fair”, keeping its currency relatively low in value and its products cheaper than they otherwise would be. It has been a campaign issue as we try to boost our own manufacturing. The only long-term solution is to have their currency traded like anything else around the world, removing the artificial barrier that has been erected between the internal Chinese economy and the rest of the world.

China is not simply leaping onto the world’s stage to play a bit part in the big show, however. By easing out slowly in the company of friends, the RMB will take up some of the trade that is currently priced in US Dollars. Along with their BRICS partners they will shove aside the need for a large Dollar reserve, a system that has tied the USofA and China together in ways that neither is comfortable with. This is the most serious challenge to date to the “Dollar Standard” that has ruled the global economy since the end of WWII.

There are many reasons why China is taking this step, and not all of them are sinister. The best way for them to relieve the internal inflation they cannot control is to project their new wealth outward into the world. Convertibility of RMB is inevitable for this reason – but wary China has found a way to do it on their own terms.

The end of the Dollar Standard forces a tremendous reckoning that we are not at all prepared for. It will certainly reduce the global value of the US Dollar as demand for it declines in international trade, making our exports more competitive. However, we have built an economy based largely on sending US Dollars overseas and getting goods in return that will soon pass into the night like some kind of strange dream if the BRICS nations get their way. Things will necessarily change as our economic influence wanes.

It’s just another agreement to be signed between nations that most people rarely think of as economic powerhouses, if they think of them at all. But it may be the most serious challenge yet to the US Dollar yet. We may say that we want RMB to trade like any other currency, but we should be a lot more careful about what we wish for.

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20 thoughts on “BRICS ‘n’ China Shop”

A great post with a breathtaking scope but if this is a turning point it needs it. I guess I can’t blame China for not wanting to play by our rules so this is the kind of thing they should have been expected to do, right?
I will have to read this again and follow the links, there is a lot here to digest.

Thanks. This is a dense topic and I did include a lot of links with more explanation on the various topics. This does all link together because we are about to get what we’ve long wanted out of China – a free floating RMB/Yuan – but we are totally unprepared for what that means. There are massive policy implications no matter what, but the bottom line for most people who don’t pay attention (nearly everyone) is that consumer goods will have to become more expensive. Laptops, telephones, TVs, all that stuff – there will be inflation in those items over the next 10 years. It may be offset by productivity improvements and other cost reductions, but we should never count on that.
Part of the reason I tend to go on my “buy less” rants is that the less we rely on this crap the less of a hit we will take when all this goes down.

It’s funny to me that nearly everyone I know thinks the US will never be what it once was like the fall of the Roman empire or something. But no one really knows why. I think you explain it very well even if you do say that the end of the empire is not so bad after all. But most people I know understand this is the case even though no one else seems to know just how and when.
Your message should get out more, people need to know this.

I think you are right – people know this is in their guts, not their heads. But to quote Pat Buchanan we are “A Republic, not an Empire”. If we go back to doing what we do best, which is pretty clearly *not* running the world, we will actually be better off in many ways that we don’t understand now.
I’ve been convinced by a number of you readers that there is a lot to put into place before we can really pull back, especially militarily. But it will have to happen someday, and the sooner we get things in place so that we can do it the better we’ll be able to manage it all.
I would love to get my message out more, yes. I’d love to have radio gigs. But sadly this has not come to pass. I think that our legacy media is not yet ready for this message – even though, as you say, most people already “get it”.

On this point we agree completely! So how do we make it so with the least pain, both for us and the rest of the world? I think that’s one of the top questions we should be asking in this election – up there with “How do we restructure to the next economy?”

I suppose this could have been a small series, but it’s more about the news as it comes in than anything else. There are a lot of links to provide back-up, so that’s what we have to go with.
I’ll think about how to make a longer single narrative out of this. Perhaps as an eBook that I can sell? Dunno.

I read this three times and I think it is sinking in. What you lay out is how everything about the dollar in the world will change right? This has to be very important and I wonder what our leaders think about it. The idea that we may actually support it makes no sense to me at all.

Yes, you have it right. Everything about the US Dollar is about to change, and this is very significant. But it is probably inevitable, so having it happen gradually will give the market time to adjust – so we probably should be a part of the process.
There are benefits to this as well. This is the only way that our manufacturing has a chance of competing in the world, meaning good paying jobs with a lot of growth potential for millions of people. How many? I can’t say for sure, but it seems to me that manufacturing jobs at about 10% of all jobs (12% of GDP) is pretty low – Germany and Japan are about double that. It could make a very big difference.
However, it does mean inflation and a lot fewer gizmos to buy. We will probably have to change how we live in many ways. Oil may become much more expensive, too, which may be a very big problem. I’m debating with @sumnums on twitter how much oil price shocks contribute to our recessions, and the short answer is that they predict them almost completely. But a slow rise in oil prices may not be as terrible, we’re going over historical data on that now.
Bu yes, this is HUGE and it means the end of an era for the US as the dominant economy in the world. We are about 23% of world product but influence far more than that. Dropping back to just our “rightful” quarter of the world would be a big decline – not the end of the world, but a very big deal.

Erik – As the world’s almost century-old police, have we done the right thing entering so many conflicts, costing billions, while the people of this great country, the ones that built it for us – and soon this will include us – are dying for lack of health care? If we have the greatest technology of the world’s medical industry – why does it have to be that, we need to go overseas to have access to it at a quarter of the cost? Defensive wars are a no brainer – but do we really need to be in Afghanistan fighting poppy seed popping Taliban while we are dying needlessly in our own country. Please address this and maybe some light can be shed on this horrific process so many Americans are going through – death without access to even the most basic life extending needs like scripts. Just wondering? Richard

Richard, I can’t say that we have been doing the right thing. I think we’ve done the easy thing, in at least some way, by throwing our weight around as much as we do. Yet it would definitely be easier and certainly a lot better for our people if we took care of our own first.
Most of what I write about is either our own inability to do anything we have to or how the rest of the world is in the process of leaving us behind. Yes, the two are very closely related! Projecting so much energy outward has allowed us to rot at the core – much the way Rome went down, in fact. But we are not an Empire, at least not internally, and we don’t have to go that way! The end of imperialism is not such a terrible thing and we can live as one nation among many others if we just learn how to take care of our own.
It’s frustrating as all Hell, isn’t it?